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GRAND RAPIDS — It was the most difficult financing deal that real estate developer Sam Cummings has ever put together, coming on the heels of the dozens of projects he has done locally since his first one in 1990 when he bought a single-story building at 517 Ottawa Ave. NW.

But after nearly three years of looking for the right project that would provide a return and would impress commercial lenders, the preliminary site work for the new Gallery on Fulton has started on the southwest corner of Fulton Street and Division Avenue.

In about two years, the development will be the new home of the Urban Institute for Contemporary Arts, as well as 56 apartments, retail space along South Division and a parking ramp with 262 spaces. Total cost of the project is expected to come in at around $34 million.

The Gallery on Fulton, though, isn’t the project Cummings and his development partner in Two West Fulton LLC — RSC Associates of Chicago — began with when they won a Request for Proposal from the city in 2005 for the 37,000-square-foot parcel on a key corner of downtown.

“The RFP, in itself, was a challenge, because what we were doing was conducting our due diligence in the public eye,” said Cummings, who recently rolled his Second Story Properties into CWD Real Estate Investment, a partnership he formed in June with Jade Pig co-owner Scott Wierda and DP Fox Ventures CEO Dan DeVos.

That development hoped for condominiums and a large national retailer, preferably a bookstore, as the anchors that would make the investment successful and entice lenders to become involved with it. But, as Cummings said, the big retailers weren’t all that interested in locating downtown, and then the local market became saturated with new condos.

“Times have changed in terms of getting projects like that to be financed with the, call it, ‘competitive landscape’ in condominiums in West Michigan — and I’m not just citing downtown — and the relative difficulty of a project like that to get financed. That quickly faded, so to speak,” he said.

UICA replaced the big retailer and was buying its space, and the city’s Parking Services agreed to buy the ramp spaces, so those two pieces of the project’s puzzle were secured.

As for the third, Two West pulled the condos from the project and looked at bringing a hotel to the site. They talked with brand names and with independent operators, but to no avail. Then the firm investigated putting an extended-stay hotel on the site, but that didn’t pan out either.

So Two West turned its attention to apartments and spent “a good deal of money” to have an independent marketing study done, which showed, for all practical purposes, that most rental units in the city were fully occupied. Now Two West had a project that would be more feasible to lenders, as there was a demand in the rental market that needed to be met.

Cummings said lenders are usually more open to underwriting projects with apartments than with condos because bankers see rental units more as a commercial investment than a residential one. Renters don’t have to get financing for their living spaces like homeowners do and, in a practical sense, are more like a restaurant owner who signs a lease for a ground-floor space in a commercial building.

“A condominium requires people — no matter how many individuals that you have — to get financing, and it’s a larger commitment. Apartments are just simply a one-year commitment,” he said.

Cummings added that if Two West proposed a new condo development today, the firm would have to have nearly 60 percent of the units pre-sold before a lender would show any interest in financing the project.

“Condominiums require prior commitments, especially in this environment when you already have a significant — perceived or real, depending on your opinion — housing slump, although we’re certainly not experiencing that, in my opinion, in downtown. But nonetheless it is pervasive in the financial community,” he said.

“So to get a residential condominium or otherwise project underwritten today is really a challenge, where an apartment project is really being viewed by the financial institutions as more commercial in nature and is much easier to underwrite.”

Cummings couldn’t recall the exact number of discussions he had with lenders about the project, but he said there were “a lot.”

During the talks, though, the unexpected happened, as the mortgage market changed drastically for the worse when the sub-prime lending crisis emerged. The overwhelming number of yet-to-come home foreclosures and the delivery of a crippling blow to the lending industry grabbed the headlines at the same time Two West was trying to find financing for its project.

“The ramification of that is you have financial institutions that have a limited amount of capital, and they’re obviously looking for a return on their capital. Just like anybody else, they’ll want the same thing,” he said.

Being in Michigan didn’t make it any easier for Two West to get a loan, either. A bank can finance projects in states that have better economic circumstances than this one, and those states can offer less risk and greater value for its investments.

“Michigan, presently, has a higher degree of risk. If it’s not 50 out of 50, it’s damn close to it, categorically. So if you’re a financial institution, you have a limited amount of capital and you have a desired yield for that capital; you’re going to play it where you get the best return with the least amount of beta, if you will, or risk,” he said.

“You say ‘Michigan’ and they say ‘not interested.’ If they can get that return without that beta, that’s what they do. I’m not saying deals aren’t getting done today.

“I’m saying some pretty solid colleagues who are really well-heeled developers with good projects and with great balance sheets are having difficulty in getting some things financed because the capital is going elsewhere.”

Two local lenders, though, ultimately decided to keep the capital here in The Gallery on Fulton, as both Fifth Third and Macatawa banks signed on to underwrite the development. Cummings gave credit to Ron Foor and Dennis Roudi of Fifth Third and to Ed Ryan of Macatawa for having the foresight and gumption to underwrite the project.

“These guys aren’t just bankers; they’re super bankers. These guys believed in it, and there were a number of times they could have fallen apart, and these guys really persisted. They became great champions, not only for us but for the city,” he said.

Cummings also offered plenty of kudos to the city and the Downtown Development Authority, which lent Two West $854,400 so it could buy its piece of the property for the project from Parking Services for $974,000 and awarded the project a reimbursement of $724,500 for street and utility improvements the firm will make at the site and for installing barrier-free access to the building.

“I have been tremendously flattered by not only the DDA and its belief in us, but also by the city,” he said.

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